Northland Capital Partners Director of Equity Research Michael Campbell up with DirectorsTalk for an exclusive interview to discuss Veltyco Group PLC (LON:VLTY)
Q1: A good trading update from Veltyco Group on Valentine’s day, can you tell us more about that update?
A1: Yes, absolutely, the business published a trading update for 2016 on, as you put it on Valentine’s day, and the results are very good. Basically, they have significantly outperformed our initial expectations for 2016, to give you a flavour for that, revenue was ahead by about 16% but moreover on the profit line that was ahead by about 48%. So, very strong performance and a very good initial year as a public company.
Q2: Now, you’ve published a note following the update on the Wednesday, can you take us through your thoughts there?
A2: Obviously, the update and the strong performance in 2016 prompted us to review our forecast for the 2 years ahead and that’s for 2017 and 2018. What’s happened there is we have increased our forecast for the profit line, we’ve increased our figures by about 34% in 2017 and in 2018 we’ve increased those profit numbers by about 29% so good double digit increases. Despite that, if you look at where the stock price is today, it’s around 44p, the stock is still trading at about 9 times earnings on those new forecasts and it’s still quite a discount to the wider peer group which is on about 13.5 times earnings. So, a good update, good strong increases to forecast, we’ve also increased our target price.
Q3: In that note, you alluded to efficient marketing spend, why is that important for the company?
A3: I did, yes. Now, these businesses are interesting, they’re pretty much built on marketing spend, what you find is the revenue generation for these online businesses that directly correlates to the amount of money you invest in marketing basically. So, marketing is a significant expenditure for the business somewhere in the order of 65-75% of the cost base is marketing but as I say, it’s important in that it is a direct drive to revenue. We’ve looked at the marketing spend and basically what’s happening is in some of the verticals that the company is involved in, they’ve finding that their marketing spend is actually more efficient than initially thought. So, for instance they’re able to acquire some of the customers at slightly less cost and furthermore some of the lifetime values are slightly higher than initially thought so it’s quite an efficient way of spending your marketing. Potentially, what it means is for a similar marketing budget one can drive more customers to the operators is what it means so yes, a very important part of the business model.
Q4: Finally, could you recap on Veltyco Group’s strategy and summarise your final thoughts?
A4: Two-fold strategy really from the company, firstly they want to grow the business organically and they’ll do that via two means and, again, that’s all around the marketing investment that we spoke about earlier so maintaining high levels of marketing investment. Also, targeting exclusive marketing agreements with operators in Europe so that’s the organic way of growing it.
Secondly, through acquisitions, they made one or two since coming to market. The industry per say is going through a structural change where there’s a bit of consolidation happening so this business there’s an opportunity to take part in that M&A sort of activity and provide growth for the business.
I guess finally, as a say, good performance, good initial performance in the first year which has led to the upgrade and we still expect strong growth coming through this year so that’s 2017, in fact profits year-on-year is, in our forecast at least, that’s looking to more than double. So, we like the story and yes, we’re buyers of the stock.
